Wednesday, October 21, 2015

Business Plan (Tradecraft)

If you are planning a new store, write your business plan. I don't really want to talk with you, until you have a plan (and a giant bucket of money). I can give you all sorts of advice, but in the end, you need to write the plan. Just write the damn plan. Why?

The business plan will demonstrate that what you're about to engage in is a very bad idea. It's going to show you the margin for error on this behemoth, that you only vaguely understand, is far thinner than you realized. Most importantly, if you do it right, it will show you the capital you need to invest is far greater than you possess. Besides not planning (if you fail to plan, you plan to fail), undercapitalization is the biggest reason small businesses fail. So what is a business plan, really?

First, let me say, I'm not an expert. I've written exactly one business plan. However, all the aspects of my business plan have been daily concerns for me for over ten years. Not just 9-5, Monday through Friday concerns, every ... single ... day concerns, all the time. That will be your life too, by the way. Other people have written far better plans than me, but that doesn't matter, and it should't matter for you. Writing a business plan is about getting your head straight.

The core of your plan is your Unique Value Proposition. What are you offering, in your market, that is unique and special enough that people will spend money on it? Your plan should include an analysis of the industry you're hoping to be in, the competition in your area, and a look at the location you're proposing. It should include a marketing plan, because you will be marketing your business on day one. After you write this section, you may come to realize you're not offering anything special, your industry is dumb, your market is saturated and your location is bad. Great! That's the first draft. Or maybe you're done. Your choice.

Your plan should then include all your financials, which will require you to understand every expense of your business. When I wrote my plan, I was off by 50% with my expense. Not enough research. With your expenses nailed down, you can project (guess, hope, dream) your income and then determine how you'll get there. I use turn rate analysis, which then tells me how much capital I need to hit my income numbers and cover my expenses. That's the method I used when we doubled our operation. This capital number is really important, because this is your gut check number. Most people will (and should) quit right here.

Why quit? You've seen the narrowness of the profit margin, you've projected your PFA income (Pulled From Ass), and you're about to invest $50,000-$150,000 or more to make this happen. It's madness. No sane person does this. Your chance of success is completely unknown. It's probably more about your character at this point than anything else. Experience will make a great deal of difference. If you don't have experience, you will buy it with more capital (startup losses).

The financial section will assume you understand things like income statements, which most non businessy people have never seen before. They'll walk you through one when you buy a house. Get help here. Don't skip this section. People are tempted to write "The Poets Business Plan," like the dumbed down science classes I had in high school, with no financials. I had no idea how to do this and I get excellent help from a good friend (and now investor) as well as bouncing it off people from SCORE. Your plan is not top secret, so go ahead and bounce it off as many people as possible. The most likely response is your income or expenses are unrealistic. Or your value proposition is not unique.

Here's the thing about small business: failure is an acceptable option. Success is great, failure is second best. The worst thing that can happen to you is something in between. You don't want to waste years of your life "getting by." The opportunity cost for you is tremendous and it will be a horrible, demoralizing period of your life. Too hopeful to quit, not successful enough to succeed. It may happen to you anyway. We were there for a couple years, mostly because we moved to a space bigger than we could afford and it took that long to grow our income. Nobody wants to buy something fun from a miserable person. Writing a plan avoids the terrible experience of limbo.

That reminds me, define success for you. How much money do you want to make? Build your salary into the plan. Take a salary from day one. If you are not taking a salary, you're not doing the thing. You want to write a plan that includes you getting paid, even if it means paying you money you just raised from yourself. You also want the option to hand it off later. You may build a successful business over a couple years, but realize you don't really want to do this. If you have a manager's salary built into your plan, you have the option of hiring someone else to do it, without losing your investment (at least not right away).

You should re-visit your plan and re-write it on occasion. I don't, but I crowd source my thoughts on this stuff all the time. If I were going to re-write my business plan or give you advice on a focus (other than the retail elements), I would suggest looking at Third Place Theory. Go through the linked article and address how your business will hit all the marks for a successful third place. Heck, if you're betting your livelihood on it, hunt down and master the source material.